FDI Foreign Direct Investment principles

FDI Concepts
Foreign Direct Investment

changes last made to this page 2021 Feb 22nd

LEARNING
OBJECTIVES The main themes that we will discuss are

Government control

Investor's control: concerns of the risk they face

Methods and ways of acquiring FDI

FDI motivations to achieve sales expansion

FDI motivations to acquire resources

Minimizing Risk

Global players, and patterns in FDI

Case Studies of FDI

Bridgestone/Firestone Tire - automotive industry

Quebecor World Inc. - printing and publishing

Scotiabank in Mexico - financial services

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including material from
Global Business Today, 2nd Ed.
Hill, McKaig ... and Richardson
Chpt 7
ISBN-10: 0-07-098411-5
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The tire business
is a big business
$225 billion worldwide

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Case Study: Bridgestone
/Firestone Tire
written by WTGR
Firestone was a well known American tire manufacturing company.
Bridgestone is a well known Japanese tire manufacturing company.
"Shojiro Ishibashi, established the Bridgestone Tire Corporation in Japan in 1931. Mr. Ishbashi took the direct English translation of his family name -"Stone-bridge" and reversed it to create "Bridgestone. This name sounded like Firestone, a company he greatly admired."
see bridgestone-firestone.ca/eng/history/default.asp (link no longer active in 2021)
As Japanese auto companies began to develop FDI situations in North America in the 1980's, the Japanese companies supplying parts and accessories, for cars, also began to seek out FDI in the U.S. and Canada. Firestone Inc. was acquired for $2.6 billion in 1988 by Bridgestone Corp. of Japan, which invested another $1.5 billion modernizing Firestone factories.
Bridgestone / Firestone then began to sell tires to the Japanese auto assembly plants in the U.S., as well as to the existing customers of the old Firestone corporation. By selling tires in the U.S. (made in the U.S.) to Japanese assemblers, Bridgestone / Firestone could avoid circumstances of tariffs or 4X [foreign exchange] problems.
WTGR

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Case Study: Bridgestone
/Firestone Tire
In 2000 Bridgestone suffered from bad press about a situation where one particular model of tire was involved in many road accidents. The allegations that Bridgestone had manufactured "a bunch of bad tires" was discussed widely in the press.
Will Bridgestone & Ford recover from the tire scandal?
cbc.ca/money/story/2000/09/06/ford000906.html (link no longer active in 2021)

Bridgestone said it was the fault of Ford's design for the SUVs that carried the tires,

Ford said it was the fault of Bridgestone which was accused of cutting costs in materials and assembly which saved money, but produced an unsafe tire.

The tires were Bridgestone/Firestone 225/70R15 Wilderness AT.
One of the biggest complaints special interest groups have against foreign investment in consumer products is that the foreign investor will create unsafe situations out of a desire to save money and recover the cost of the investment.
The case of Bridgestone/Firestone turned nasty because the company was accused of continuing to sell the 225/70R15 Wilderness AT's in other parts of the world after they withdrew them from the North American market.
Disclaimer: For the record, Prof. Richardson owned a Ford Truck which came with Bridgestone/Firestone 225/70R15 Wilderness tires and he might not be entirely objective about the company.
WTGR

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Case Study: Bridgestone/Firestone

Aside from the negative media coverage of Bridgestone/Firestone, (summer of 2000) the case study of why, and how Bridgestone investment in Firestone serves as a good example of FDI since it covers the main categories of what is involved in an overseas manufacturing investment.

.FDI to grow the company worldwide

Enhacing capability in the U.S. would enhance the capability of Bridgestone globally since the U.S. is a key driver of the world-wide automotive market

FDI to avoid trade barriers

Bridgestone bought Firestone so that it could manufacture tires in the U.S.A. for Japanese automakers selling vehicles to Americans

FDI as a result of following your customer

Bridgestone had been selling tires to the major Japanese auto assemblers and when these assemblers set up plants in the U.S.A. and Canada, Bridgestone followed in order to maintain those customers and not lose them to other tire manufacturers

FDI to avoid 4X disadvantage

When the Japanese yen rose against the U.S. dollar in the mid-1980's, it became more expensive to import Japanese tires into the U.S.A. If tires were made in the U.S.A. and sold to Japanese customers in the U.S.A., Bridgestone could avoid the cost of a high Yen/Dollar currency exchange rate

FDI to take advantage of a 4X advantage

When the Japanese yen rose against the U.S. dollar in the mid-1980's, it also meant that Japanese business people had more money to "buy dollars" and therefore investing in the U.S.A. became comparitively cheaper because of the higher Yen

FDI to "buy" marketshare

If a company considers it financially expensive to compete with a local strong brand, one of the solutions is to buy a local brand in that country which is the same as "buying" local marketshare

FDI to acquire local management expertise

Given a choice between opening up their own operation run by Japanese, or having an operation run by Americans - who knew the U.S.A. market, Bridgestone considered it wiser to buy Firestone since it would instantly give them access to a U.S.A. management team

FDI's effect on local jobs

One of the consequences of a foreign aquisition is the tendancy for the new foreign owners to want to try to increase productivity and cut costs. The most common way of cutting costs is to cut the numbers of employees and make the existing employees work harder and produce more. "In 1979 about 127,000 Americans worked in tire manufacturing. In 1983 the figure was just 94,000, by 1994 it averaged 81,300. Yet these 81,300 tire workers managed to produce a record 260 million tires. In fact, 36% fewer workers made 17% more tires" said Daniel Akst, Los Angeles Times Magazine
the main reason why the Quebec government agreed to support the expansion of the plant in Joliette was because 1,250 jobs were at stake if this facility did not become more competitive

FDI's supported by host government support

Sometimes the decision to carry out an FDI situation, or expand an existing situation , depends on any financial support provided by the host government.
This support can be in the form of corporate tax concessions, or an outright financial contribution, like the example in Quebec in Nov 2005.

Update 2005

A story in the newspaper in November 2005 explained that the Quebec government is financially supporting an expansion of the Bridgestone-Firestone Canada plant northeast of Montreal near Joliette.

Bridgestone-Firestone will contribute $49.8 million and the Quebec gov't will contribute $3.5 million for the expansion which is intended to maintain 1,250 jobs.

Bridgestone said "the tire industry has changed significantly because of globalization, automation and diversity of demand." The investment is intended to allow the company to make high-performance and large-diameter tires.

When the Quebec government announced their contribution to the expansion, Economic Development Minister Claude Bechard said "this will reinforce the competitiveness of Bridgestone-Firestone", which he described as "a valuable contributor to the economic health of the region."

The Joliette plant, founded in 1965, makes 16,000 tires per day

tirereview.com says "This investment builds upon the 2018 announcement by Bridgestone about the construction of an automated warehouse at its Canadian passenger and light truck tire manufacturing facility in Joliette, Québec."

2021 Update

Bridgestone announced in Jan 2021 that they will invest $48 million
in a new Canadian distribution center in Ancaster.

Ancaster is south west of Toronto.

Host Government control
vs.
Foreign Investor's control

KEY
POINTS

One of the critical understandings of FDI is the conflict potential between the foreign investor and the local government. In many cases, the foreign investor has some situation in which it needs freedom to do something locally, and the national government in the country it is investing might cause interference. One the other side, national governments want foreign investment for the money it brings in employment and other spending, but they also fear that the foreign company may do something negative which would adversely effect the country and its citizens.

WTGR

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Gov't
Control

Government control:

While many governments want the advantages of foreign investment they also want to be able to control it and make sure that the situations that develop, are not adverse to the best interests of the host country.
Some situations that would be adverse relate to

inappropriate technology
over dependence on the foreign investor as an employer in a key industry
allowing the foreign investor too much access to critical resources
finding that the investor was engaged in activities hostile to the host country economy

dumping products at prices which make the host country unable to compete in a critical market
economic espionage

"competitive executive recruitment" - hiring away key scientists and engineers
stealing corporate information from host country companies
engaging in counterfeiting and illegal manufacture of brands and trademarks

inappropriate management of labour, or allowing for unsafe working conditions

(these above points are not all listed in the course text)

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Government control:

inappropriate management of labour, or allowing for unsafe working conditions

Canadian Army bomb squad in Afghanistan

A clear example of how a foreign company can do something that is NOT in the best interests of the local employees, and runs contrary to the local government concerns - is the case of Wal-Mart in St-Jean-Sur-Richelieu, Quebec in 2006

In 2006, workers at a Walmart store in St-Jean-Sur-Richelieu, Quebec, were ordered by management to help police search for a bomb, even though police recommended to company officials that the store should be completely evacuated. “This was a pretty sad message about how much value Walmart puts on the lives of its workers,” said the local union official.

from Nickels et al Understanding Canadian Business 7th edition McGrawHill 2010

Investor's
Control

Investor's control:

While foreign investors obviously want to obtain resources and advantages for the investment that they are making, at the same time they want to be able to exert some control to make sure that the circumstances of the investment do not leave the host nation with "too much" that will allow them to create a competitive situation against the foreign investor.

Example : Goodyear terminated its agreement with Japanese company Bridgestone in 1997 because Goodyear feared that the Japanese company had gained too much from the investment and would be in a position to be competitive with Goodyear in other Asian markets.

Gov't
Control

Host Government control vs Foreign Investor's control
Example;

Canadian mining company Cambior Inc. www.cambior.com
- FDI & Joint Venture with government of Guyana

July 2003 - story released to Associated Press and carried in The Toronto Star

Cambior laid off hundeds of workers as it began running a Joint Venture with the government of Guyana. the JV was a bauxite enterprise. The JV required Cambior's to take over responsibility to mine and market production from the Linden mine.

The political consequences of this is as follows, the government in power consented to Cambior laying off the miners - but the political opposition parties say there was not enough consultation during negotiations. Cambior thinks they are doing Guyana a favour since they will be able to run the mine more efficiently and sell the processed ore at good prices in a market which has seen bauxite prices fall. Bauxite is used for making aluminium.

There is no mention (July 2003) of this JV on Cambior's site since it is fairly new compared to their other projects in Latin America.

(Cambior also runs a gold mine in Guyana which had annual production of 319,600 ounces in 2002 - with gold being over $300 an ounce this is a project worth more than $100 million annually)

Case Study:

Following
the
customer

Scotiabank
in
Russia

Scotia bank opens office in Moscow

An example of FDI as a result of following your customer

Scotiabank announced in late November 2007 that they have a received a license from Russian regulators to open a representative office in Moscow.

Scotiabank, in talking about this expansion, boated that "we will be the only Canadian bank to have on-the-ground presence in BRIC - Brazil Russia India and China"

In a statement clearing citing an example of "following the customer" Scotiabank said "strong Canadian companies, such as Magna and Kinross Gold are expanding their presence in the Russian market and our office in Moscow will enable us to provide direct, relevant support to them..."

Case Study:

FDI
supported
by host
government
support

Scotiabank
in
Russia

Scotia bank opens office in Moscow

An example of FDI supported by host government support

When Scotiabank announced in late November 2007 that they have a received a license from Russian regulators to open a representative office in Moscow their press release noted
http://micro.newswire.ca/release.cgi?rkey=1511294557&view=85223-0&Start=0

"I am very pleased to welcome Scotiabank to Russia," said Russian
Ambassador to Canada Georgiy Mamedov. "Today's announcement coincides with the arrival of Mr. Victor Zubkov, Prime Minister of the Government of the Russian Federation as part of ongoing discussions with the Canadian government and Canadian companies aimed at exploring opportunities for Russians and Canadians to work together. We look forward to working with Scotiabank as they establish a presence in Moscow."

Getting the Russian Ambassador to make positive comment about the FDI is as high as you can go in obtaining Host Government Support

Globalization
and FDI

KEY
POINTS

In our first lecture, one of the themes discussed was Globalization and the effect it has had on international business.

Globalization has also had an effect on Foreign Direct Investment and in fact some people say FDI causes Globalization whereas others say because we have Globalization, we have pressure to have more FDI.

WTGR

"The multinational corporation has become the dominant force leading the globalization process and determining the future of the world economy."

"The increase in corporate power has come about primarily through increased foreign investment...Key elements are: an increase of investment from the Northern industrial economies and Japan into Asia; control over 75 percent of world trade; control of certain global product markets by a handful of multinational corporations; control over the use of industrial technology by global patent law; involvement with transnational banks in increased financial flows and ideological conversion of key government and intergovernmental institutions.
Vic Thorpe 1997

Costs and Benefits of FDI

Chpt 7

Costs and Benefits of FDI

Benefits of inward FDI for a Host Country

Resource-Transfer Effects

eg. use of robotic technology brought in by Toyota & Honda at their assembly plants in Ontario

Employment Effects

Ont. Gov't regularly woos foreign auto parts companies to come to the province since the result is much needed jobs in manufacturing sector

Balance-of-payments Effects

inward FDI can replace imports
eg. Honda and Toyota mfg. in Ontario - then exporting to the U.S.

Costs and Benefits of FDI

Costs of inward FDI for a Host Country

Adverse Effects on Competition

the new foreign subsidiaries may grow to have more economic power and more attractively priced products than the Host Country companies

Adverse Effects on Balance of-payments

if the foreign subsidiary imports large quantities - this contributes to the Home Country having a balance-of-payments deficit

National Soverignty and Autonomy

concern about key decisions can effect the host country economy
"fear seems to be that if foreigners hold assets ... they can somehow hold the country to ransom" - depends on the amount

a small amount may result in the foreign company being a bully
a large amount means a foreign company is vulnerable and needs to co-operate

Costs and Benefits of FDI

Benefits to the Home Country of the FDI company

the current account of the home country's balance of payments

eg. Starbucks in Asia returns money to Starbucks in USA

employment in the home country resulting when foreign subsidiary imports capital equipment from the home country

eg. Canadian mining operations use Canadian technology and mining equipment

foreign experience results in better competitiveness "back home" in a global marketplace

eg. ROOTS Canada, by going into the U.S. and European market has built brand awareness and gained consumer experience which makes the brand even stronger in Canada - same can be said for R.I.M. and their BlackBerry

Costs and Benefits of FDI

Costs to the Home Country of the FDI company

home country trade position may deteriorate if the FDI results on low cost goods being brought back to the home country - displacing home country goods

eg. a Canadian textile company moving clothing operation to Latin America results in textile workers in Canada losing their jobs
eg. Gildan T-shirts in Honduras, Nicaragura, Haiti and the Dominican Republic

http://www.witiger.com/internationalbusiness/UNCTAD.htm

click to access the short unit on UNCTAD

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